Economic Outlook

There is something really interesting going on in the media. There has been an increase in the number of “economic bright spot” stories. This can be thought of as the equivalent to the “r-word” (recession) index often complied by the Economist magazine.

The increase in the number of positively spun stories is a pretty good indicator that the economy has at least reached or is close to the bottom of the trough. This is a good thing. It means we might be able to focus some attention on some of the fundamental flaws in the economy, rather than panicking about the “end of the world”.

This of course doesn’t mean we’re going to return to the unemployment levels and GDP growth we saw in 2006&2007. We’re more likely to see unemployment in the US and Canada stabilization around 7% to 9%. A significant portion of the drop in unemployment rates will be driven by “discouraged” workers. These are the people that give up looking for work as they don’t believe they will find a job to their liking. A decade or more of “zombism” as seen in Japan will likely have significant cultural effects. But that’s an issue for another blog.

The underlying problem of the global economy will have to be address if unemployment and GDP growth rates are to improve in North America. It can be argued that these problems were major contributing factors to the credit crunch and the ensuing panic. There are a couple of major problems that will have to be addressed.

First, the growth in the American standard of living has far out paced the growth rate of productivity. The lack of productivity growth can clearly be seen in incomes outside the financial sector for the last 10 or so years. US median incomes have generally not changed over that period of time. The productivity measures (generally for manufacturing) tell pretty much the same story. The only way standard of living can increase faster than productivity is borrowing. The flood of cheap credit from the Federal Reserve and abroad made this borrowing possible. When the flow of loanable funds becomes unstable, the system collapses.

The second issue is the real cause for concern. North American economies have seen exceptionally low productivity growth for an extended period of time. This is clearly going to limit the sustainable level of GDP growth. It may be that North American economies have improved productivity as far as they can given current technology. This would indicate low future growth. It might also explain why the average income in the US has been stagnant. The average likely reflects (to a greater degree than the extremes) the overall productivity growth of an economy.

Overall, it looks like we’ve fallen as close to as far as we’re going to for now, but that doesn’t we’re going to return to the growth rates we saw in 2006/2007. We’re likely to be limping for a while yet.